VW Phaeton - Did Zeus' anger hit sales of Volkswagen's luxury car

Table of contents

List of figures

1 Introduction

2 Customer wanted

3 The luxury car market in Germany

4 Volkswagen’s current performance in Germany

5 SWOT analyses applied to the VW Phaeton

6 The PEST analysis
6.1 Demographic environment
6.2 Economic environment
6.3 Natural environment
6.4 Technological environment
6.5 Political-legal environment
6.6 Socio-cultural environment

7 Strategic recommendations

8 Conclusion

Appendices

References

List of figures

Figure 1: Ansoff’s Product-Market Expansion Grid (Ansoff, 1957: 114) applied to the VW Phaeton

Figure 2: Luxury car sales in Germany 1999 to 2003

Figure 3: BCG-Matrix applied to the Volkswagen products in Germany

Figure 4: GE model applied to Volkswagen products in Germany 2002

Figure 5: GE model: Strategies Marketing Volkswagen Phaeton

1 Introduction

After the introduction of the first Volkswagen luxury car in May 2002, sales are still far behind the Volkswagen’s expectation (Handelsblatt, 2003). It seems that the VW Phaeton faces the same destiny as its antique namesake Phaeton In the Greek mythology, Phaeton was the son of Helios, the sun god. Helios has drive n the family chariot across the sky, wearing the rays of the sun as a crown, lighting the day. One day Phaeton convinced his father to lend him the beautiful chariot. But Phaeton, in contrast to his father, was not able to drive the chariot appropriately, and drove the chariot so close to the earth that he boiled the oceans and scorched the land. So Zeus had to stop him by killing him with a lightning bolt (Vaughn, 2003).

Volkswagen certainly had not considered this explanation when naming the Phaeton, but referred more likely to the second meaning of Phaeton; an elegant carriage of the 17th century which the owners drove on their own.

Nevertheless, there are signs that the Volkswagen engagement in the high-class (luxury) car market is tougher than expected. It seems people are less persuadable to buy a high-quality car of the experienced and renowned German car manufacturer.

This shows the divergence of the formerly targeted 12.000 to 15.000 units (Weernink, 2001) annually in global sales 2003 which is opposed by the actual numbers of only 2.600 units in Germany - the main market of the Phaeton - from January to October (Kraftfahrtbundesamt KBA) and estimated sales of 3500 units worldwide (Handelsblatt, 2003). The targeted sales of 20.000 units in 2004 (Weernink, 2003) seem to be completely unrealistic. Recent news, published in the Wirtschaftswoche (2 December 2003), state that Volkswagen is planning a special depreciation of € 400m (about £ 280m) on the Phaeton. Wulff, the prime minister of the Bundesland Niedersachsen (a German state), which owns 18.6 per cent as the biggest shareholder of Volkswagen and therefore holds a permanent seat in Volkswagen’s supervisory board, reproach Volkswagen for strategic failures. He argues that Volkswagen has focussed too much on the development of luxury cars and has neglected its core business of high-volume cars, e.g. VW Golf and VW Polo (Wirtschaftswoche, 2 December 2003).

But the Volkswagen top-management remains silent. Although Volkswagen always claims that the Phaeton’s technology, specifications and passenger protection is absolutely comparable with the competing Mercedes S-Class, BMW 7 and Audi A8, customers seem to spot a big disadvantage of the VW Phaeton - the lack of perception and the missing customer benefit of expressing the driver’s status.

2 Customer wanted

The intention of Volkswagen’s concentric diversification strategy - to set up a new product, which has technological and/or marketing synergies with existing products, in a new market - is clear. Volkswagen wants to close its gap in the luxury class.

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Figure 1: Ansoff’s Product-Market Expansion Grid (Ansoff, 1957: 114) applied to the VW Phaeton

According to Kisiel (2003), fifteen per cent of Volkswagen customers leave to buy a luxury brand’s product. Volkswagen tries to retain customers that are in the market for a luxury car, targeting on “non-conformist buyers” who do not care about reputation and badge.

Thus Frank Maguire, the vice president of sales and marketing for VW of America - VW has launched the Phaeton in the USA in late November 2003 - wants to sell the Marketing Volkswagen Phaeton Phaeton to “transcendent drivers, they’re proud to be different… people who wanted luxury but didn’t want to be saddled with a luxury badge, people not looking for status, not worrying about what their neighbours are driving” (Vaughn, 2003: 17). But these customers normally drive an old Westphalia camper van or a flamboyant sports car. But the VW Phaeton offers neither camping equipment nor a breathtaking, distinguishing design.

In Germany, where the VW Phaeton was launched first, its prices have been close to the competitors. The V8 model for example is priced at about € 73,350 (about £ 50,000), the equivalent competitors range around the same price. But Volkswagen, as you probably know, means “people’s car” - not a really good brand name for a € 70,000 car. More than that, Volkswagen did not seem to be courageous while designing the car. Cynics say it looks like a “stretched VW Passat” (Vaughn, 2003) and it is almost identical with the Audi A8.

Consequently, customers do not seem to be overwhelmed by the appearance of the VW Phaeton. The luxury car market is extremely segmented due to the established brands and the perception of these brands. “Audi is for the sporty driver, for instance a BMW driver” says VW board member Wilfried Bockelmann - Audi is a subsidiary of Volkswagen. BMW is supposed to be innovative and sportive. But the VW Phaeton is targeting for the “Mercedes-Benz driver, who is looking for comfort and very good style, but the No. 1 goal is not sporty”, according to Bockelmann.

3 The luxury car market in Germany

Due to the fact that Volkswagen targets the customers of the Mercedes S-Class, the actual sales of the five big players in the luxury car market in Germany, as illustrated in exhibit 2, can give some information on the current situation of the market.

Obviously, the luxury car market was struck by the recession of the German economy. Car buyers have increasingly focussed on smaller and cheaper cars. Some car manufacturers, e.g. BMW and Mercedes, have lost luxury car customers to their own new high middle-class models (BMW 5 and Mercedes E-Class) while these have become bigger and have obtained more specifications.

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Figure 2: Luxury car sales in Germany 1999 to 2003

According to that, Volkswagen launched the Phaeton in a wrong time. The weak demand of luxury cars in Germany - as well as all over Europe - certainly affects the sales of the Phaeton. Additionally, the targeted Mercedes S-Class customers do not seem to be interested in the Phaeton seriously. The Phaeton sales in 2003 have hardly increased because the Phaeton was introduced in May 2002 and therefore it has been being in sales for only eight months in 2002. That means that the increase of sales of the VW Phaeton in Germany in 2003 (in contrast to 2002), as illustrated in Exhibit 1, is only marginal. Clearly, the whole market is in a crisis at the moment, but the weak demand for luxury cars is not the only reason for the disappointing performance of the VW Phaeton.

4 Volkswagen’s current performance in Germany

Certainly, the German car market is in a crisis at the moment. The following BostonConsulting-Group (BCG) matrix illustrates the situation of Volkswagen business-units’ markets in Germany - which are equal to the product lines.

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Figure 3: BCG-Matrix applied to the Volkswagen products in Germany

Obviously, the recession in Germany affects the car market. Even the major markets of middle -class cars are stagnating or even shrinking. Therefore, this BCG matrix is not suitable for using the four related BCG strategies (Stars: hold; Question marks: build; cash cows: harvest; poor dogs: divest) to forecast Volkswagen’s future decisions. However, this matrix gives an overview over the success of the product lines and the condition of the target markets of Volkswagen. There are 3 markets developing very fast, the SUV market, the midsize van market, and the compact car market. Especially the midsize van VW Touran and the SUV VW Touareg have good chances to gather more market share in these fast-developing markets in 2004.

More than that, the matrix illustrates the core businesses of Volkswagen according to the production output worldwide (Volkswagen, 2003), the product lines Golf, Polo and Passat. The VW Golf is market leader, and has a 2.5 times bigger market share than its closest competitor, the Opel Astra. The VW Polo is leading the compact car market which is growing by more than 9 per cent. Exhibit 2 clearly highlights the core businesses of Volkswagen, medium priced cars in the compact and middle class.

The VW Phaeton neither has a big market share nor is positioned in a growing market. The above noted supposition that the VW Phaeton is the wrong car at the wrong time in the wrong place seems to be true. But only a SWOT analysis which examines the microeconomic strengths and weaknesses, and the macroeconomic opportunities and threats can respond to this assumption more reliably.

5 SWOT analyses applied to the VW Phaeton

The SWOT analysis reflects the internal environment analysis of the strengths and weaknesses of the product, and the external environment analysis of the opportunities and threats (Kotler, 2000).

The analysis of strengths and weaknesses can be evaluated in form of a marketing memo, a check list which includes a variety of product-relied questions. This helps to review “marketing, financial, manufacturing and organizational competencies and rates each factor as a major strength, minor strength, neutral factor, minor weakness, or a major weakness” (Kotler, 2000: 78). As shown in Appendix 2, the checklist illustrates two major strengths and four major weaknesses of the VW Phaeton compared to its competitors. Especially the major strengths or weaknesses with a high importance are crucial for the products success or failure, and should be either preserved or fixed. Regarding the Phaeton, Volkswagen’s major weakness is the brand name and the reputation of Volkswagen as a mass- manufacturer - cars for the people . But Volkswagen decided to sell the Phaeton as a Volkswagen, and this is not reversible. Maybe, the car would have been more successful with a “new” brand logo on the car, e.g. Toyota created the brand Lexus for this purpose.

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